BSP Says Rate Hikes Might Cause Debt Payment Issues for Firms

According to the Bangko Sentral ng Pilipinas (BSP), the tightening financial climate in light of the aggressive rate hikes could result in more firms experiencing difficulting servicing immediate debt payments.

In stress-test exercises done by the BSP, results show that more firms in the financial, property, holdings, services and industrial sectors can sustain interest coverage ratios (ICRs) below the International Monetary Fund’s set threshold.

The ICR is used to measure the debt-servicing capacities of the corporate sectors. This is computed by dividing the earnings before interest and taxes (EBIT) account by the interest expense account.

The BSP mentioned that firms that have low ICRs are likely to encounter solvency and liquidity issues that can bring about reduction or default in employment and investment, which would risk the financial stability and economic growth at a large scale.

In this exercise, the BSP predicts the effects of a decline in earnings of the corporate sector, a rise in interest rates, and the depreciation of the foreign exchange rates on the ICR of firms.

The BSP also says that with the increasing interest rates and weakening peso, closer monitoring of corporate financial health specifically leveraging activities, debt servicing capacity, solvency, and profitability is encouraged.

The central bank stresses that the firms from sectors that were greatly affected by the pandemic and have collected big foreign currency debt can encounter difficulties in maintaining operations and paying off debt.

Source: Philstar